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EPCOR Distribution & Transmission Inc. Disposition of Substation Property, AUC Decision 25442-D01-2020

Link to Decision Summarized

Disposition of Substation Property

In this decision, the AUC considered an application from EPCOR Distribution & Transmission Inc.’s (“EPCOR” or “EDTI”) to dispose of substation property No. 200 (the “substation property”), which included the land and substation building. The AUC approved EDTI’s application to dispose of the substation property.

AUC Findings

Disposition of Assets and the Ordinary Course of the Business

The AUC noted that section 101(2)(d) of the Public Utilities Act (“PUA”) prevents a designated owner of a public utility, such as EPCOR, from disposing of assets outside the ordinary course of business without first obtaining the approval of the AUC. Any disposition without such prior approval is void. The AUC referred to Order U2001-196 wherein the Alberta Energy and Utilities Board, a predecessor of the AUC, outlined the criteria to be used in determining whether a disposition should be treated as being outside the ordinary course of business:

… The Board confirms that it must first determine whether the disposition of an asset is outside the ordinary course of business for a utility. The proceeds of disposition, NBV [net book value], frequency and type of sale would be among the factors considered by the Board in that determination. The quantum, and materiality (in relation to the total rate base) of the proceeds of disposition and the NBV would all be considered. For example in this case, the NBV of $2,163,801 would be at the bottom end of the range of dispositions the Board would consider as outside the ordinary course of business. With respect to the frequency and type of sale the Board does not agree with NGTL [NOVA Gas Transmission Ltd.] that acquiring and divesting regional service centres, maintenance facilities, and field offices are necessarily in the ordinary course of NGTL’s business. The Board considers that NGTL’s ordinary business is the owning and operating of a pipeline, not the acquiring and divesting of real estate.

… The final determination whether a disposition is outside the ordinary course continues to rest with the Board.

The AUC found that EDTI’s proposed sale of the substation property was outside the ordinary course of EDTI’s business and the disposition required AUC approval pursuant to section 101(2)(d) of the PUA. The AUC noted that the sale price and the estimated net sale proceeds of the sale of $1.13 million (or 10 percent less using the revised valuation) were within the range of other similar EDTI disposition applications previously found by the AUC to be material. Given the amount of the proceeds here, the similarity of the nature of this disposition to prior disposition proceedings, and prior approvals regarding the quantum and materiality in relation to total rate base, the AUC was prepared to determine in this case that the proposed disposition was outside the ordinary course of EDTI’s business.

The AUC noted that other criteria identified in Order U2001-196 include frequency of the disposition and the type of sale. EDTI stated that it engages in these types of transactions infrequently and only when a property is no longer required for its ordinary course of business, which is the provision of electric utility service. EDTI explained that eight applications for dispositions outside the ordinary course of business have been approved or applied for since 2006, yielding a ratio of one disposition every 1.8 years during that period. However, the AUC indicated it understands that as part of EDTI’s program to update its distribution network and accommodate growth in its service territory; four more applications will be received in the next three years for substation dispositions. The ratio will therefore be approaching 1.0 disposition application per year. The AUC found that this level of frequency shows that these transactions are not rare. Therefore, the AUC indicated that in the future, similar disposition applications may be considered to be within the ordinary course of business, as a more common occurrence for EDTI.

Assessment of Harm

The AUC noted that, in deciding whether to approve a disposition application that is outside the ordinary course of business under section 101(2)(d) of the PUA, the AUC and its predecessor board have traditionally applied a “no-harm” test. The AUC stated that an application of the no-harm test requires the AUC to consider whether or not the transaction will adversely affect the quantity or quality of service or customer rates.

The AUC found that the disposition of the substation property would not result in adverse service or rate impacts. The AUC noted that the substation property is no longer required for the provision of electricity service, and therefore the proposed disposition would have no adverse effect on the quality and quantity of utility service, and the disposition would not create any adverse financial impact to ratepayers.

The AUC noted that EDTI intends to sell or dispose of the substation property at a fair market value and that EDTI has assured the AUC that ratepayers will bear no costs arising from the disposition. The AUC found that given that EDTI proposed to dispose of the substation property at its fair market value and that ratepayers would bear no costs arising from its disposal, the disposition of the substation property would not result in harm to customers.

The AUC also found that all net proceeds of sale and any net gains arising from the disposition were to be for the account of the utility shareholders, in accordance with the Stores Block decision.

The AUC directed EDTI to provide confirmation and details of the disposition, including the net proceeds of the disposition of substation property, in its next application dealing with actual rate base.

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